A word of warning to GLD Fund holders. Bank of America, and now Citigroup, problems could trigger a sell-off in gold. ZeroHedge lays out the scenario in what has been a major series of increasingly gloomy posts. Consider that Paulson’s fund is heavily exposed to the banks and has already incurred significant losses this year. A liquidation in Paulson’s Gold Position (via millions of shares of GLD) could become necessary to raise liquidity should things get increasingly worse. This would happen very quickly. The Post on ZeroHedge speculates that a 20-30% decline is gold could very well be possible.
ZeroHedge is careful to point out that this is just a theoretical exercise, but we think it illustrates a key point. When financial crises kick in, like they are now, the cascading repercussions and problems in the spaghetti like inter-connectedness of our financial system should always be considered by traders and investors. When celebrating a big win like one might be tempted to do with gold at the moment, consider that the very thing triggering the current rally could just as easily trigger a major decline. This would certainly take silver down in sympathy as well. Be careful.
Make no mistake, we have been and remain bullish on precious metals.
There are certainly going to be some wild swings along the way, but if those swings are caused by the kind of speculation above coming to fruition, we only become that much more confident in our position.
November 14, 2011 Update: Per ZeroHedge today, Paulson indeed liquidated a third of its GLD holdings. More interesting is that he increased Bank of America and Capital One holdings!